Margarita Arnold

ECO 201-1W0V

Problem Set #1

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1. Scarcity forces a person to make choices. For example: the scarcity of money will make me make the choice between doing my homework or picking up an extra shift at work. Since I am scarce on money, I will make the choice to work. The opportunity cost is the time sacrifice I made to do my homework another day. Economists say “there is no free lunch” because someone must bear the cost in the end. Since we have a scarcity of land, labor, and capital, but we chose a “free lunch”; we bean an opportunity cost. The opportunity cost for “free lunch” is the opportunity that something else may have been done with the land, labor, and capital.

2. The four economic resources are: households, businesses, product, and resource markets. Households are entrepreneurs that occupy houses and own private property. Households are consumers that buy the goods and services that businesses make available in the product market. Households also consist of ‘dollar votes’ which determine what goods and services are selling. A firm is a business that can be a sole proprietorship, partnership, or corporation that sells to households. The resource market (households) sells resources for businesses to buy. The households buy from the product market with income they earn from labor, land, capital, and entrepreneurial abilities.

3. If a society does not take advantage of specialization of labor and labor productivity, the costs of workers exceed the benefits. Each individual worker will cost society money for retraining on a job. Also, if there is no investment in capital, labor productivity will decrease: labor is less productive without investments in the future.

4. I. Command System (Communism): You might not be a carpenter, but rather a lawyer. The government will hire you anyway to be a certified carpenter.

II. Traditional Economy: Your last name is Woodwright, and you come from a long lineage of carpenters and wood workers (specialized labor). You get hired no matter how good you are, just based on your family history.

III. Market System (Capitalism): You go to trade school, or get special training on the job. You love carpentry so much that you open your own business. There are plenty of other carpenters, and consumers have choices. They pick you because their neighbors recommended you, or you are the best rated on Angie’s List for labor prices and quality of work.

5. Because we live in a capitalist economy, businesses and households indicate to producers the price of a certain product. Producers have to compete so the consumers will buy that product. Consumers look for the lowest price, and producers look how to make a product at the lowest price. This means producers must utilize land, labor, capital, and entrepreneurial abilities in order to minimize the cost to make a product. Consumer choice based on ‘dollar votes’ communicates to producers to stop or keep making a good. Pure capitalism tends to be allocative efficient, because the producers make what the consumers want.

6. What goods and services will be produced?

The market system decides on what goods and services will be produced based on profit. The goods and services that are continually making profit will continue to be produced, while those that are not making a profit will be discontinued.

How will the goods and services be produced?

In combinations and ways that minimize the cost per unit of output. The most efficient production depends on technology, or knowledge and technique that combine economic resources to make also be minimal.

Who will get that goods and services?

The goods will be distributed to consumers that are willing to pay the market price. The money the consumers have depends on:

1. The quantities of the property and human resources they supply2. The prices these resources command in the resource market

How will the system accommodate change?

Consumer preferences affect the price and profits: such as buying more juice and less milk, gives the juice industry a chance to expand.

How will the system promote progress?

1. Technological advances: the market system offers a strong incentive for technological advances and enables better products and processes to supplant inferior ones.

2. Capital accumulation: most technological advances require additional capital goods. Through ‘dollar votes’ the market system allows a firm to acquire capital goods through sales of goods and services.

Creative destruction is related to these five questions; through creation of new products raises the wants of consumers. In turn, consumers abandon ‘old’ or not as new products causing companies or producers of these old products to innovate or fail. Example: Desktops → Laptops

7. Division of labor results in more production as a result of specialization.

1. Specialization enables individuals to take advantage of existing differences (physically/mentally) in their abilities and skills.

2. By devoting time to a single task, an individual is more likely to develop the skills required and to improve techniques than by working on a number of different tasks.

3. By devoting time to a single task, an individual avoids the loss of time incurred in shifting from one job to another. Time is saved by not ‘fumbling around’ with tasks that one is not trained to do.

8. Coincidence of wants is a situation in which the good or service that one trader desires to obtain is the same as that which another trader desires to give up, and an item that the second trader wants to acquire is the same as that which the first trader wants desires to surrender. Example: If I wanted to trade my purse bought from Target worth $30 for a purse bought from Coach worth $500. All though my target purse is ultra-cute, no one would think that would be a fair trade.

Money solves this problem: by giving the trader who does not my $30 Target purse by itself, $450 in cash. Target purse and $450 really sweetens the deal.

9. Property rights are important because they give individuals and businesses the right to make legal binding contacts without the government being involved. Property is capital for individuals who want to use its resources. Property rights encourage investments, innovation, exchange, and economic growth.

10. 86400 pins/20 pins=4320 workers

4300 workers are freed

Division of labor is a division of knowledge because of labor specialization.Jobs associated with making of a pencil: miners, loggers, and train engineers

11. a) Price ↑, quantity ↑b) Price ↓, quantity ↑c) Price ↑, quantity ↓d) Price ↓, quantity ↓e) Price ↑, indeterminate quantityf) Demand